Gogo - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered solid top-line growth and profit metrics: revenue $226.0M (+121% YoY; -2% QoQ), diluted EPS $0.09, adjusted EBITDA $61.7M with 27.3% margin; results modestly exceeded Street on revenue/EPS, with EBITDA mixed depending on definition. Compared to Q1 2025, service revenue dipped 2% and equipment revenue rose 1%.
• Mix shift continued: AVANCE AOL grew to 4,791 (+14% YoY), now 71% of ATG fleet, while total ATG AOL declined 4% YoY; GEO AOL rose to 1,321 (+15% YoY) underscoring the OEM line-fit strategy.
• Guidance raised to the high end for FY2025 revenue ($870–$910M), adjusted EBITDA ($200–$220M), and FCF ($60–$90M), with higher expected FCC reimbursements and increased gross capex to accelerate LTE build/strategic programs.
• Strategic catalysts: reiterated 5G Q4 2025 launch (first end-to-end 5G call completed), Galileo HDX/FDX product progress, and synergy run-rate target increased to $30–$35M; management flagged potential refinancing over coming quarters as deleveraging progresses.
• Stock-relevant narrative: raised guidance, execution on 5G/Galileo, and improving synergy run-rate should support estimate revisions and sentiment; ATG AOL decline remains a watch item, with management pointing to LTE cutover/C1 incentives and 5G commercialization as stabilization drivers.

What Went Well and What Went Wrong

What Went Well

• Record AVANCE equipment performance: AVANCE units sold 276 (+19% YoY, +15% QoQ), highest in two years; AVANCE share of ATG fleet rose to 71%. CEO: “We see significant demand for broadband performance improvements… well positioned… as we bring Gogo 5G and Galileo to market this year.”
• GEO momentum and OEM line-fit: GEO AOL reached 1,321 (+15% YoY; +41 QoQ), with stable ARPU and fixed-term contracts supporting revenue durability.
• Guidance and synergy upgrades: FY2025 guidance lifted to high end; synergy run-rate raised to $30–$35M within two years; CFO: “We now expect to achieve run rate synergies in the $30–$35M range…”.

What Went Wrong

• ATG AOL decline: total ATG AOL fell to 6,730 (-4% YoY; -2% QoQ), with suspensions and maintenance on classic installs; management expects stabilization as C1 LTE upgrades and 5G/LTE rollouts ramp.
• Cost pressures and tariff backdrop: elevated costs including integration-related items ($3.6M in Q2) and earnout liability change ($3.9M); tariff exposure modest but fluid, embedded within guidance.
• Near-term EBITDA trajectory: management noted second-half EBITDA likely slightly lower vs H1 due to timing of investments even after guidance raise.

Transcript

Speaker 5

Today, and thank you for standing by. Welcome to the Q2 2025 Gogo Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press *11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press *11 again. Please be advised that this conference is being recorded. I would now like to turn the conference over to the first speaker today, Will Davis, Vice President of Investor Relations. Please go ahead.

Speaker 0

Thank you and good morning, everyone. Welcome to Gogo Inc.'s second quarter 2025 earnings conference call. Joining me today to talk about our results are Chris Moore, CEO, and Zach Cotner, CFO. Before we get started, I would like to take this opportunity to remind you that during the course of this call, we may make forward-looking statements regarding future events and the future performance of the company. We caution you to consider the risk factors that could cause actual results to differ materially from those in the forward-looking statements on this call. Those risk factors are described in our earnings release filed this morning and in a more fully detailed note under risk factors filed in our annual report on 10-K and 10-Q and other documents that we have filed with the SEC. In addition, please note that the date of this conference call is August 7, 2025.

Any forward-looking statements that we make today are based on assumptions as of this date, and we undertake no obligation to update these statements as a result of more information or future events. During this call, we'll present both GAAP and non-GAAP financial measures. We have included a reconciliation and explanation of adjustments and other considerations of our non-GAAP measures to the most comparable GAAP measures in our second quarter earnings release. This call is being broadcast, webcasted, and available at ir.gogoair.com. The earnings release is also available on the website. After management comments, we'll host a Q&A session with the financial community only. It is now my great pleasure to turn the call over to Chris.

Speaker 6

Thanks, Will, and good morning, everyone. We believe our Q2 performance reflects the fundamental strengths and capabilities of our business to revolutionize inflight connectivity by leveraging our strong market position as the only independent global multi-orbit, multi-band connectivity company in aviation. With LEO, GEO, and ATG broadband, we are strongly positioned to support durable demand trends. In Q2, the business continued to show growth as demand for our GEO solutions remained strong across the global business, aviation, and military government mobility markets, as we see increased advanced shipments and continued rollout of Gogo Galileo's STCs. Zach will provide more details on our financial performance shortly, but I first want to highlight some key areas of growth and success. Starting with ATG, we reached several significant milestones in the quarter.

It gives our team great pride that we announced an important industry first as we completed the initial end-to-end call using the Gogo 5G chip. We now have the first 5G aircraft in hand and are progressing with the remaining developments, integration, and testing that will prepare us for our expected Q4 launch this year on the already deployed and operational 5G terrestrial infrastructure. We also have positive news regarding our FCC Rip and Replace program, which now provides a $35,000 incentive for C1 installations completed before December 31, 2025. The C1 incentive enables upgrades for over 40 aircraft models to our LTE network. This funding and certification allows Classic customers to seamlessly upgrade in advance of the May 8, 2026 Classic network cutover. We also had significant announcements for Gogo Galileo with the two OEM wins.

Embraer announced it will offer Gogo Galileo HDX as an aftermarket option for the popular Phenom 300 light jet, which has over 800 aircraft in operation. Textron also announced that the HDX will be available for aftermarket installations on Cessna Citation types once the FAA has confirmed the STC. This is expected in late 2025. We're expected to continue delivering on the 38 HDX STCs under contract through our dealer and OEM networks. We now have eight HDX STCs approved covering 10 aircraft types with a further 30 in development. STCs for the FDX variants are in progress with 10 STC contracts in the works with dealers. As previously announced, we have also signed an agreement with an undisclosed OEM confirming FDX will be the option for all its production aircraft. On the back of this good news, I'm looking forward to reviewing our strong Q2 performance.

I'll cover our quarterly operating results, provide updates on our GEO broadband services, and highlight realized acquisition-related cost synergies. We will also review our demand potential and outline our strategic approach to capitalize on these opportunities to enhance shareholder value. I'll finish by sharing progress on key strategic initiatives. Our free cash flow exceeded our internal forecast and consensus expectations. This was driven by high growth profit due to record equipment revenue, lower operating expenses, continued synergy realization, and higher than expected adjusted EBITDA at approximately $62 million. On the revenue front, the higher than expected advanced equipment sales and higher ARPA on GEO services contributed to driving revenue 3% above consensus.

Though we're still seeing a gradual decline in ATG units online, we expect to see this slow and perhaps even turn around as Classic customers start taking advantage of our C1 rebate program and others decide to upgrade from Classic to Advanced in anticipation of our Classic network cutover to LTE in May 2026. Towards that end, we set a record for ATG shipments in the quarter with 405, including 276 Advanced and 129 C1 units. Shipments are a strong indicator of future online activations. We also set a record 144 Classic to Advanced upgrades for the quarter as shipments turned into activations. We had strong performance in our HDX LEO terminals as we recognize $1.7 million of equipment revenue. Year to date, we have shipped a total of 77 units.

As I stated earlier, we now have eight HDX STCs approved covering 10 aircraft types with a further 30 STCs in development. We have also shipped our first three Gogo Galileo FDX units to support STC generation for mid to large business jet customers. Our GEO products and airline aircraft online continue to grow, up 41 units from Q1 with 1,321 aircraft connected to Gogo. This is up 177 units from Q2 2024, up 15%. This demonstrates the power of the OEM line fit as many of these systems are installed at the factory. We also believe it shows a predisposition of many heavy jet customers to take both LEO and GEO offerings to get the capacity, redundancy, and global coverage that neither LEO nor GEO can provide alone. For instance, no LEO provider today can provide service in China that GEO can.

In Q2, we completed synchronizing our Advanced and SDR routers to schedule. The router located in the aircraft is the core of inflight connectivity systems and data management. The SDR, SDRG, and Advanced routers are now compatible for Gogo Galileo installation, allowing for easy upgrade opportunities for customers. This adds the approximate 2,400 aircraft equipped with SDR routers to the almost 4,800 Advanced installed Gogo fleet. These aircraft can now be installed with Gogo Galileo without extensive rewiring inside the aircraft. It's also worth noting that the Satcom Direct routers are lined with on three aircraft models, which adds several hundreds of aircraft a year to that easy install fleet. Additional software and hardware harmonization for our router family are scheduled for the next two years, which will continue to improve performance for customers and lower costs for Gogo.

Gogo remains the only company that can satisfy the needs of customers seeking multiple connectivity solutions from a single source. The military needs to fulfill PACE, primary, alternate, contingent, and emergency requirements, and global customers want assured redundancy. This gives us a significant competitive advantage in some very attractive segments of the market. We are progressing towards our synergy goals. We've completed most of the key actions to reach our now anticipated $30 to $35 million synergy cost savings. We've completed staff synergies associated with the merger, along with other actions such as the Chicago data center transition to the Melbourne, Florida site, the transition of the SD Avionics manufacturing to Colorado, which is targeted to be completed by the year-end. The SD Melbourne building sale is expected to be finalized by the end of August.

This will offset the $15 to $20 million investment required to achieve the projected recurring synergy savings. In total, we have another 36 integration projects still underway, focused on moving to common systems and process, and we expect further cost synergies from many of these. Business aviation is currently characterized by strong OEM results, expanding fractional fleets, and robust flight counts. In Q2, the five major OEMs increased aircraft deliveries 11% year on year and reported a very strong aggregate book-to-bill of 1.3 times the trend. It's set to continue, and with the World's Big Beautiful Bill Act signed in July, allowing businesses to deduct the full acquisition cost of eligible aircraft, we believe this positive momentum will continue into 2026. We believe this presents a significant opportunity for the increased broadband connectivity installations and a major opportunity for Gogo.

This sector remains buoyant with recent announcements confirming strong market growth. Fractional ownership operator Flexjet announced an investment of $800 million. The company has indicated that much of it will be spent on improving passenger experience, much of which relies on connectivity. In addition, Bombardier recently announced a new fleet order for 50 aircraft with an option for a further 70, presenting a considerable opportunity for Gogo. This trend indicates more business aircraft will be entering the global fleet than leaving, and more hours being flown. As a result, demand for connectivity should continue to increase. International governments are seeking alternative satellite suppliers, which provides an opportunity for Gogo and our multi-network approach. The French government has already strengthened OneWeb's competitive position by becoming Eutelsat's largest shareholder following a $1.55 billion capital commitment. This will support continued OneWeb network investments.

As OneWeb's only connectivity service partner for business aviation, we believe this strengthens our position to respond to growing demand and maximize our global office expansion. In summary, we see demand for quality inflight connectivity in both business aviation and military government mobility verticals surging while overall penetration remains extremely low, only 9,700 or 24% of roughly 41,000 global business aircraft which have broadband connectivity today. Gogo's strategy for value creation is to grow our share of a highly unpenetrated market by strengthening existing and creating new long-term high-margin recurring revenue customer relationships. We plan to do this by first delivering the many new products I've just described that significantly improve performance over traditional inflight connectivity products. Second, engineering equipment that is purpose-built for our markets and easier to install, maintain, and upgrade than competitor products.

Third, expanding our addressable market by utilizing the broad product offering and global footprint facilitated by this Satcom Direct-Gogo merger to satisfy the needs of all segments of our vertical markets. Fourth, leveraging our significant presence in those markets to attract the best technology, distribution, and network partners on the best terms to serve our customers, and finally, provide the world-class customer support that our customers demand. This strategy underpins our approach to multi-network, open-architecture platforms and enables broad mission coverage across both business aviation and military government markets. That flexibility is core to our future-proofed hardware design strategy that can support multiple bearers with network-agnostic modular terminals such as our Plain Simple GEO and Gogo LEO antenna portfolio.

With the upcoming launch of multiple Ka-band LEO networks, Gogo can leverage our terminal network architecture so we remain agnostic about our customers enabling the latest developments from satellite providers on any aircraft type. Our expanding global support network is a key part of the distribution partners' part of this strategy. We now have 148 dealers across 233 locations. These dealers are invested in STC generation, ongoing customer support, and as our representatives across the globe act as a force multiplier to our sales efforts. Now I'd like to share a few updates on the progress we're making towards some of the efforts that support this strategy. Since the start of operations in April, our LEO Eutelsat OneWeb customers have used over 1,200 hours. HDX is ideal for the 12,000 mid-size and smaller aircraft that fly outside of North America and have no broadband solution today.

An aircraft among the 11,000 mid-size and smaller North American registered aircraft that often fly regionally outside KONUS or want faster mean speeds than 5G alone can provide. The FDX terminal is designed for the 9,700 larger business aircraft operators, many of which fly into continental missions as well as our VVIP and government clients. We are off to a strong start for Galileo. Our early customers are positive about the HDX performance, and we have more than 500 immediate opportunities for HDX in our sales pipeline. 40% of these are overseas, and we are seeing strong interest from international operators. We've already signed our first multi-aircraft deal with a Middle East charter operator.

As I mentioned at the start, we've made a crucial step forward in terms of our 5G product, which is targeted at large segments of the North American mid-size and smaller market that want a good connectivity experience but a lower cost than satellite products. Our chipset supplier successfully completed the first end-to-end call using the Gogo 5G chip in June. The chip is now in the final phase of testing at our Broomfield and Chicago facilities. Following the integration into the Advanced LX5, flight testing is anticipated to commence in September and to go live by year-end. It is worth noting that we have already made a bulk chip purchase to ensure supply for our customers when ready. More than 300 aircraft are now pre-provisioned for launch. The 5G tower network is complete with 170 installed across the U.S. and southern Canada.

Gogo has already received FAA approval to produce and manufacture the Advanced LX5 LIU and 25 STCs for the new antenna covering 8,500 aircraft. The new 5G core is installed in our data center. Our next generation LTE network deployment is also underway. The first LTE tower antenna has been installed, and we are beginning network build-out in anticipation for the cutover. Supporting the transition, we announced a multiple aircraft type STC for the Gogo C1 unit. This covers 42 aircraft, representing 70% of the installed Gogo Classic fleet. We have already shipped 234 units for customers. As mentioned previously, the FCC Rip and Replace program now provides incentives for C1 installations, assisting customers with the replacement of the old Gogo Classic installs.

The C1 LTE box has the same form factor as the old Classic product, allowing for a very fast unit swap, but it has dual EVDO and LTE aircards. This enables a seamless network cutover. For customers lacking the time or budget for an advanced upgrade before the May 2026 transition, this solution enables a cost-effective option and keeps our customers connected and preserves Gogo service revenue from this market segment. We are urging customers to commit before year-end to take advantage of the FCC rebate and be ready for the cutover. In the milgov vertical, we see an opportunity for Gogo solutions to be integrated with SD's GEO offerings. Our current revenue mix in this segment includes a significant portion of legacy narrowband services, which are expected to decline gradually over the next several years.

However, we anticipate broadband growth in the milgov sector will materially outpace the decline in narrowband as the segment transitions to broadband solutions. Today, almost all milgov mobility aircraft still rely heavily on voice over radio and narrowband for communications, which is limited in bandwidth. There is a significant effort underway to upgrade to new broadband satellite technologies. The U.S. Air Force 25 by 25 program aims to equip 25% of this 1,100 mobility aircraft with satellite communications by the end of 2025. This still leaves 70.5% of the fleet without satellite connectivity, which the Air Force believes must be addressed, presenting a substantial opportunity for growth. We believe Gogo's LEO product will be an excellent complement to our GEO product in this market due to the DOD's PACE protocol, which requires military programs to have primary, alternate, contingent, and emergency systems.

With the support of the government funding, Gogo is also leveraging our SD Pro operating system, which enables monitoring and utilization of PACE. We also see the opportunity for 5G air-to-ground as a possible new alternative for redundancy. While there have been some delays in awards, the general trend towards better communication systems for aircraft aligns with the U.S. administration's broader goal for modernizing the military. We've also added a key resource to the Gogo Board of Directors with the recent appointment of retired General Mike Minahan. Finally, I'll touch briefly on tariffs. We have made provision, and while our decisions remain fluid, we believe that as trade deals currently stand, there is minimal impact on aviation and our exposure is much reduced. In conclusion, we are pleased that our strategic investments are now being delivered.

We are uniquely positioned to capitalize on the increased demand of inflight connectivity as our multi-orbit, multi-band approach gives the business a competitive edge. We feel very positive about the merger process. We are achieving the cost, product, and commercial synergies we wanted to accomplish with the SD-Gogo combination. We expect to produce compelling financial results in 2026, driven by growth in service revenue from our new products, a significant reduction in product program spend, the full-year impact of synergies made in 2025, and full funding of our FCC Rip and Replace program. Now I will hand over to Zach to talk about the numbers.

Speaker 4

Thanks, Chris, and good morning, everyone. Like last quarter, I'm pleased to report that second quarter results were ahead of expectations for revenue, adjusted EBITDA, and free cash flow. Our integration is progressing well, cost controls are taking root, and the demand for our new products continues to ramp. As our product investments roll off, we continue to expect solid free cash flow growth in 2026, combined with further deleveraging. Strong first half results led to improvements across the board in our 2025 financial guidance, which I'll discuss later in my remarks. Our 2025 guidance continues to reflect limited new product revenue, given most HDX shipments are STC-focused and our 5G network is anticipated to launch in Q4. 2025 remains an investment year, priming the pump for new product service revenue in 2026 and beyond.

I'll now provide an overview of Gogo's second quarter financial performance, then I will turn to our capital allocation priorities and our positive outlook regarding a potential refinancing over the coming quarters. Finally, I'll conclude with additional context on our raised 2025 financial guidance. On a combined pro forma basis, Gogo's total revenue in the second quarter was $226 million, up 1% year over year and down about 2% sequentially. On a standalone basis, Satcom Direct's Q2 revenue grew approximately 1% from the prior year. Total service revenue of $194 million increased 137% over the prior year and declined 2% compared to the prior quarter. At the end of Q2, total ATG aircraft online was 6,730, or a decline of approximately 4% versus the prior year period and down 2.5% sequentially.

Despite the pressure on total ATG AOL, Advanced AOL grew nearly 14% from the prior year period and now comprises more than 71% of the total ATG fleet, up from 60% in Q2 2024. In the last two years, our total Advanced AOL has grown by nearly 1,200. Our 2025 guidance continues to assume Advanced AOL growth, but the total overall ATG AOL will be lower at year-end 2025 versus year-end 2024. We believe that the rollout of 5G and LTE will help improve the trajectory of our ATG subscriber trends. Total ATG ARPU of $3,445 was relatively flat versus both the prior year and the prior quarter. Total broadband GEO AOL, excluding networks that are end-of-life, reached 1,321, up 15% from the prior year and 3% sequentially. This strength underscores our strong line fit positions with OEMs.

In addition, most GEO broadband aircraft are under fixed-term contracts, which helps to create revenue stability, and our GEO ARPU is holding up better than expected. Now I'll turn to equipment revenue. Total equipment revenue in the second quarter was $32.1 million, up 59% year over year and 1% sequentially. Total advanced equipment shipments of 276 increased 19% versus the prior year period and 15% sequentially. This was our highest advanced equipment shipment quarter in the last two years, and we believe this strength bodes well for the future conversion of Classic customers to Advanced ahead of our LTE network cutover. Regarding our profitability, Gogo delivered combined service margins inclusive of Satcom Direct of 52.9%, up slightly sequentially. Standalone Gogo service margin was approximately 77% and in line with our previously stated targets.

Service gross profit accounted for 96% of our total gross profit in Q2, and we focus on driving this recurring high-margin service revenue. Equipment margins were nearly 14% in the second quarter. As a reminder, we expect Galileo equipment pricing to be close to cost. Now turning to our operating expenses, total Q2 operating expenses, excluding depreciation and amortization, were $55.9 million, down roughly $2 million sequentially. I will now provide additional commentary on our major strategic initiatives: 5G, Galileo, and the FCC reimbursement program. In the second quarter, $1.5 million of 5G spending was all tied to CapEx. We expect total 5G spend to decline significantly in 2026 as we roll out 5G in Q4. Turning to Galileo, we recorded $1.3 million in OpEx in the second quarter.

We continue to expect total external development costs for both the HDX and FDX solutions to be less than $50 million, of which $31 million was incurred from 2022 through the first half of 2025, and approximately $9 million is expected for the rest of the year. We anticipate approximately 80% of Galileo's external development costs will be in OpEx. Finally, our FCC reimbursement program. Following the passage of the National Defense Authorization Act last year, we continue to anticipate increased reimbursement of about $50 million for our FCC program. This funding will support the upgrade of our ATG network to LTE and provide incentives to upgrade our Classic fleet to Advanced. In the second quarter, we received $5.9 million in FCC grant funding, bringing our program-to-date total to $53.4 million.

As of June 30, 2025, we recorded a $9.8 million receivable from the FCC and incurred $5.4 million in reimbursable spend during the quarter. The receivable is included in prepaid expenses and other current assets on our balance sheet, with corresponding reductions to property and equipment, inventory, and contract assets, with a pickup in the income statement. Moving to our bottom line, Gogo generated $61.7 million in adjusted EBITDA in the second quarter. Our adjusted EBITDA margin was 27.3% as compared to our initial long-term view in the mid-20s when the Satcom Direct acquisition was announced last year. Gogo reported second quarter net income of $12.8 million and $0.09 of diluted EPS. I will now provide some color on our synergy progress.

I'm pleased to announce that within two years, we now expect to achieve run-rate synergies in the $30 to $35 million range, up from our prior view of $25 to $30 million. While we achieved the vast majority of headcount reductions, we expect further cost improvements from non-headcount areas like real estate and back-office software solutions. We achieved $18 million of run-rate synergies at the close of the acquisition, another $9 million during the first quarter, and a further $2 million in the second quarter. We continue to believe the cost to achieve these synergies will be within our previously expected range of $15 to $20 million. Moving to free cash flow, Gogo generated $34 million of free cash flow in the quarter, above expectations and totaling $64 million in the first half.

While we expect free cash flow in the second half of 2025 to be lower than the first half, we believe our recent cash flow trends present well for our longer-term outlook once investments roll off, new product service revenue begins, and we continue to deliver. Now I'll turn to a discussion of our balance sheet. Gogo ended the quarter with $102.1 million in cash and short-term investments and $850 million in outstanding principal on our two term loans, with our $122 million revolver remaining undrawn. Our cash balance at last Monday was $116 million. For Q2, this equates to a net leverage ratio of 3.2 times, and we expect this ratio to remain relatively flat through year-end with a slight downward bias. Our cash interest paid for the second quarter net of hedge cash flow was $16 million.

As previously discussed, our hedge agreement stepped down at the end of July to $250 million, with the strike rate increasing from 125 basis points to 225 basis points, resulting in approximately 30% of the loans being hedged. As a reminder, the cash interest paid for 2024 net of hedge cash flow was $33 million, and we continue to expect that to be approximately $70 million this year. Given our improved financial performance and relative strength of the credit markets, we and our banking partners believe there is sufficient market appetite to pursue a comprehensive refinancing over the coming quarters. We believe this would be a positive outcome for Gogo and its stakeholders. Our capital allocation priorities remain consistent with prior quarters and focused on executing across the following four priorities in order. First, maintaining adequate liquidity. Second, continuing to invest in our strategic opportunities, primarily through Galileo and 5G.

Third, maintaining an appropriate level of leverage for the economic environment, with a target net leverage ratio of 2.5 to 3.5 times, and finally, returning capital to shareholders. As a reminder, Gogo had $12.1 million remaining on its $50 million repurchase authorization that our board approved in September of 2023. Until we complete our refinancing, we expect to continue to prioritize deleveraging over equity buybacks. Bottom line, we believe our expected free cash flow growth over the next few years will provide ample excess cash to pay down debt, reduce our interest expense, and ultimately return capital to shareholders. In our earnings release this morning, we increased key elements of our 2025 financial guidance. For the year, we expect total revenue at the high end of the previously guided range of $870 to $910 million, which reflects our HDX launch in Q1 and 5G generating modest equipment revenue in Q4.

Adjusted EBITDA at the high end of our previously guided range of $200 to $220 million, reflecting operating expenses of approximately $20 million for strategic investments, including 5G and Galileo, versus our prior expectations of $25 million. Given our guidance, we expect the second half EBITDA will decline slightly versus the first half, largely due to timing of planned investments. Free cash flow at the high end of our previously guided range of $60 to $90 million, and we expect 2025 to be the trough of our free cash flow as we have approximately $60 million slated for strategic investments, net of any FCC reimbursement, versus prior expectations of $70 million. Our net CapEx is still expected to be $40 million after $50 million of CapEx reimbursement from the FCC reimbursement program.

After two full quarters following the close of the Satcom Direct deal, we are seeing the clear benefits of the combination, including global expansion, product expertise, synergies, and the addition of a milgov business. We have more work to do, but believe we are well positioned to deliver the balance sheet, drive free cash flow, and create long-term shareholder value. Before we open up the floor for questions, I want to express my gratitude to the entire Gogo team for their hard work, commitment to our business, and dedication to providing exceptional service to our customers. Operator, this now concludes our prepared remarks, and we're ready to take questions.

Speaker 5

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you need to press star one-one on your telephone and wait for your name to be announced. To withdraw your question, please press star one-one again. Please stand by while I compile the Q&A roster. Our first question comes from Scott Searle from ROTH Capital. Please go ahead.

Speaker 3

Hey, good morning. Thanks for taking my questions and thanks for the comprehensive overview. Hey, Chris, maybe to just jump in on the ATG front, down $170 this quarter. I know there are a lot of moving parts in terms of 5G transitions, reimbursement programs that are ongoing, and there have been longer maintenance events. I'm wondering, you know, can you take us through a timeline of when you expect to see a return to growth in ATG and what the ultimate opportunity and penetration opportunity is for ATG when you look at aircraft within North America? I think there's a lot of different issues out there in terms of how much is ATG versus the Galileo potential.

I'd love to kind of understand stabilization timelines, which seem like it should be coinciding now with 5G commercialization, but how that growth should ramp up into 2026 and beyond with 5G and with C1.

Speaker 6

Okay, that's good. There's a lot there. Let me, I'll start with kind of like market opportunity and where we kind of see that, and I'll let Zach chip in with the numbers and kind of how we see that playing out. I think if you look at the suspensions and deactivations over that period of time in the quarter, obviously it's a little bit more than previous, but I think if you look at the Advanced shipments, the real reason for that is upgrades. You can already see there's strong pull in that, and the Advanced numbers are obviously extremely strong. We're not concerned with the suspensions, although obviously they're a little bit higher than previous.

I think also now with building the strong backlog in the Galileo product portfolio, we're feeling pretty confident that those customers are looking at the product portfolio as well, and then with the announcement of 5G. We're not concerned or any concerns at this point that we can't migrate customers, and also with the FCC funding, with the C1, that now those customers have really got a good path, and we've only just got that done at zero cost of upgrading themselves to the new LTE network as well. We think we're going to kind of keep customers. Also, they're not just leaving the network. There are a number of suspensions in there. We see that with kind of seasonal behavior, maintenance. We logged that pretty well. At this point, we think we've got a strong growth path.

We've got multiple products in the portfolio for customers to go to, and we're seeing strong performance with the Advanced shipment. I think we're in a good spot. I don't know whether Zach, you want to add anything to that on the number side.

Speaker 3

Yeah, I mean, I think, like we've said in the guidance, we still assume that the net ATG numbers are going to be down this year, but we're hopeful that next year with the C1 and the 5G launch, like you said, that will start to pick back up. The other thing that's interesting is when we look at deactivation reasoning, the highest drivers are consistent with what we've seen in other quarters, which are, like to Chris's point, sold aircraft or management changes, right? I think we also mentioned in the last call, we've kind of ramped up our inside sales teams to really focus on these customers. It's early days, like we said, because it just kind of started in Q2, but they have a little bit of progress, but we got to get more focused on it. Very, very helpful.

Just to clarify, Chris, on that front, these are not competitive losses to Starlink. This is suspensions, and this is the normal transition that we see in the ATG business now ahead of two major product cycles.

Speaker 6

Yeah, we're not seeing a mass level of loss to competition, no. It's, you know, like Zach Cotner said, it's the same reasons. We have a really comprehensive deactivation process. We're not seeing kind of like mass losses to competition in the deactivation.

Speaker 3

Gotcha. Lastly, if I could, then I'll get back in the queue, on the GEO front, you guys, I think, continue to outperform the early expectations, both in terms of aircraft and I think pricing. I'm wondering if you could just give us some longer-term thoughts in that market, because I think at the time of the acquisition, there was some concern around the ARPUs related to the GEO market opportunity. It doesn't really seem like that's materializing, at least not as fast. I'm wondering if you could just give some updated thoughts on that opportunity and how you see GEO progressing over the next couple of years. Thanks.

Speaker 6

I'll cover the business side, do you want to cover the ARPU piece?

Speaker 3

Yeah, I think, as we said before, we anticipated even last year before the deal that we were going to see more ARPU contraction. I think the nice thing that's happened is, like we said, a lot of times this stuff is very expensive to swap out, right? If it's good enough for a lot of folks, they're not going to spend $500,000, $600,000 if it's satisfying their needs. I think our view is longer term, it's going to have to come down slightly. It's just the rate at which it does, it's kind of anybody's guess. Like I said, we're working on our long-term model, and it will assume modest degradation over the next few years.

Speaker 6

Yeah, I'll just add to, I think customers have been waiting for Galileo. I think that's a good testament to customers believing in Gogo, which is great. We've just got to get obviously the products out to them, which we're now executing on, which is fantastic. The other piece with the GEO business, we also launched our own products within that within the last few years, which actually really enhanced the performance of those networks with the Plain Simple range. I think also, just like what I said in the script, you know, it's just kind of like earlier on, it's a testament to having line fit positions, which we're very lucky to have, really, and we've worked hard to get. You can see that kind of working through the OEMs as well as the MROs. Those products are predominantly really strong OEM products.

I think with that mix, like Zach said, that business is holding up really, really well.

Speaker 3

Great, thanks so much. I'll get back in the queue. Really exciting to see what's going on with 5G and the traction that you're seeing with Galileo. Thanks.

Speaker 6

Thank you.

Speaker 3

Thanks, Scott.

Speaker 5

Thank you. As a reminder, to ask a question, you will need to press star one-one on your telephone and wait for your name to be announced. I am showing no further questions at this time. I will now turn it over to Will Davis for close. One moment, please.

Speaker 0

I think somebody just came in on Antoine.

Speaker 5

All right, we have Scott Searle from ROTH Capital. Please go ahead.

Speaker 3

Hey, I apologize. If no one else is going to hop on, I'll pepper you with a few more. You know, Chris, it sounds like there's some interesting opportunities percolating with 5G private network opportunities. I think you referenced some military applications potentially in North America. I'm wondering if there's any additional color on that front. I'm not sure if there were some 5G metrics that you provided in terms of the number of 5G-ready aircraft at this point in time, you know, as we start to get to that 4G launch time period.

Speaker 6

Yeah, I mean, I'll cover the government piece, and then I'll let Zach stick to the numbers, so they're nice and accurate. With that military business, I mean, it's really new to Gogo, but not from the Satcom Direct point of view from the business. We've been in the government business pretty much for over 20 years. Looking at the 5G piece and the opportunity of those increased speeds, and then looking at the U.S. DOD, we really do think there's some opportunity there of giving kind of broadband resilience with PACE planning. The other thing we're looking at is the potential with UAVs, which I mentioned on a previous call as well.

We've started looking at that with HDX as well on the fact that we see that market growing massively from the military markets, not only from a domestic point of view, but from a global point of view for Galileo. Actually, 5G could be a really interesting alternative for KONUS, and we're pursuing those opportunities at the moment. It's very early days, but the fact that we're starting to talk to the customers about that, we're actually getting some level of interest on exploring that. Now we've got the product. Our government team's really in tune with the DOD and the different aspects of government within the U.S. We kind of see that as being a potential new market. We're just exploring it, early days, but pretty excited. On the backlog, it's.

Speaker 0

I think it's a little over 300. It's pre-provisioned.

Speaker 6

Yeah, they're all pre-provisioned. The network's there. I mean, it's all rolled out. The towers are done. As I said before, it's just kind of getting these 5G cards in those boxes and converting those customers really quick. Those customers have been fantastic, really patient. We're really motivated on getting those guys over really, really quickly.

Speaker 3

Great. Thanks so much. I'll get back in the queue.

Speaker 6

No problem. Thank you.

Speaker 5

Thank you. Our next question comes from Zach Cotner from Morgan Stanley. Please go ahead.

Speaker 0

Yeah, hi. Good morning. Thanks for taking the questions. A few quick ones from me. Maybe can you just provide a little more color on the CapEx guidance change? I understand the net number doesn't change, but just maybe the underlying drivers of the difference in the guide.

Speaker 3

Yeah, it's all related to the reimbursement for the Rip and Replace program. Basically, we've accelerated some stuff that would have hit next year. It's really to make sure in advance of the cutover date that we're totally buttoned up. It's just pulling in from next year, and like I said, it's all reimbursed. Basically, everything else is pretty similar.

Speaker 0

Okay, great. Maybe just on the HDX shipments in the quarter, it looks like they might have stepped down sequentially. Is there anything to call out? I mean, was that a dynamic that was sort of anticipated or anything to call out there? Thanks.

Speaker 6

Yeah, that was anticipated. At the moment, we're rolling out those STCs. Really, at the moment, this is all just preparation work for 2026. From an STC point of view, we've pretty much, you know, on the HDX, got them all shipped out to our MRO partners. We've got great traction there. We do have customers now starting to deploy, which is great. That's the aviation cycles. Unfortunately, it's a good and it's a bad thing. It's a difficult market to get into from a competitor's point of view, which kind of gives us good moats around the business. Equally, you've got to get, you know, the products ready. You've got them to go through the FAA. You've got all of those aspects to it. As we've said previously on calls, 2025 for us is really a build year on making sure that we've got those STCs.

This is all kind of anticipated. We don't see any slowdown and ramp on the product.

Speaker 0

Okay, great. Maybe just last one on the mil gov business. Chris, I think you mentioned in your prepared remarks, you know, some delays in awards. Just curious if you could elaborate there. I mean, is that trend holding steady or does that look like it might reverse? You know, just because we got the President's budget and the one big beautiful bill act, just from a mil gov perspective, is there anything above or below expectations in either of those? Thanks?

Speaker 6

Yeah, I mean, things are moving a little bit slower than expected. There's just the nature of the government business, really. Awards come, you try and influence as much as you can. The budget cycles operate a little bit differently as well. We're hoping we start seeing a little bit more movement in Q4, where typically, from a trend point of view, we've seen that.

Speaker 0

Fiscal year, yeah, it starts right now.

Speaker 6

The fiscal year starts, I think it's October, right? Yeah, I think hopefully we start seeing things through. I would say there's definitely an acknowledgement with the administration on the need for the technology refresh. We've had a lot of interest on demonstrations, technology, the CIPA awards. The research grant awards are really strong. We're looking at next year rolling out our software within the Air Force, which is a really good point for us. They've been a great partner with us as well, the U.S. Air Force, on developing that software platform with them. I think things will start picking up, but it's a really difficult thing to predict. The one piece of it, what we've seen, it's small business, but it's exceptional growth this year. It's actually been the international market.

I think that kind of step-up of NATO, people looking at the budget, we're starting to see a lot of interest being generated from overseas clients. That team's been growing quite a lot. The way they contract is quite different to the DOD as well. The fiscal cycles are a little bit different. We're very optimistic. Team's working really hard, doing a really good job. We'll kind of wait and see. The technology is there, which is the exciting piece. It's not like we're now waiting for the technology to come. I think with the expanse of the product portfolio and delivering on the product portfolio, I think we've now got something really interesting for the military.

Speaker 0

Perfect. Thanks for the color.

Speaker 6

Thank you, Justin. Thank you.

Speaker 5

Thank you. Our last question comes from Louie DiPalma from William Blair. Please go ahead.

Speaker 1

Chris, Zach, and Will, good morning.

Speaker 6

Hey, Louis.

Speaker 1

Do you remain confident in, I think, approximately $65 million in cost for 2025 coming out in 2026 as it relates to the different synergies and milestone payments for 5G, HDX, and FDX? How should we think of like the costs in 2025 versus 2026?

Speaker 3

Yeah, I think we still feel like the vast majority of that will go away. Like you said, we get the full year of synergies. Obviously, we're kind of working on our R&D roadmap. I don't know that we're ready to release what all the projects are we're working on. Some of that will get backfilled, but the vast majority will be pulled out.

Speaker 1

Great. One final one. From a high level, as you and customers have done more testing of HDX and FDX, just in general, how does it compare with Starlink in the market? Even though there are many less OneWeb satellites than Starlink, it appears that the OneWeb constellation is far less utilized. How has the performance and testing been for the different solutions? I missed the first part of the call, but what is the timing for flight tests of 5G?

Speaker 6

Yeah, I'll handle the 5G thing, but Louie. We've got the customers ready to go, really got FTCs and things flying. From a network point of view, rollout in Q4 is planned and migrating those customers over. There's no holdup there. The 5G thing's pretty straightforward. Now we've got the chip. On the performance on Galileo, we're seeing great performance metrics. The nice thing is we're not seeing people do futile speed tests in the cabin because they can do what they want to do. That low latency, snappy product feel is what they've got. We've got aircraft now flying around, capturing a lot of data. We're seeing very consistent service, happy customers. The fact that we've truly designed an aviation-grade product, and more importantly, we've got the support because things do happen from a network's point of view that we make that seamless for customers.

We can get an engineer. We advertise under 24 hours on an aircraft anywhere in the world. The reality is we don't really go beyond 12 hours and having that human touch if we need it. The team's been great. Customers have been fantastic. Some big anchor clients who we've announced before in the past, they're moving ahead and very, very happy with the service. We're very enthusiastic. We're seeing great performance on the FDX as well, and we're just wrapping up the FTCs on that. This is a bit where everybody kind of looks at satellite networks and speed tests, whereas having consistent performance in flights, and you can fly anywhere in the world with our services, whether you're using dual-purpose service or you're not, so you're using multi-networks or a single network.

Our aim is to have consistent service anywhere a client flies anywhere in the world, and I think we can safely say that we can do that.

Speaker 1

Great. Thanks.

Speaker 0

Thank you.

Speaker 6

Thanks.

Speaker 5

Thank you. The question and answer session is now closed. I will now turn it over to Will Davis for closing remarks.

Speaker 0

Thank you all for your participation in our second quarter earnings call. You may disconnect.

Speaker 5

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Good.